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“The biggest change ever made to the benefits system… is currently failing too many people and forcing many into debt.”

This is the conclusion of a new report from Citizens Advice on Universal Credit (UC). It warns that the roll-out should be paused to allow ‘significant problems’ to be fixed.

What is Universal Credit?

UC was introduced in 2013, with the aim of simplifying the benefits system, making transitions into work easier and making every hour of work pay. UC replaces six means-tested benefits and tax credits with one benefit, to be paid in arrears, as a single household payment, on a monthly basis.

The objective of UC is to help people on low incomes or not in work to meet their living costs. It affects a range of people, both employed and unemployed, disabled people with health conditions, single people, families, homeowners and renters.

Roll-out so far has been gradual but the process is to speed up considerably from October. By the end of roll-out in 2022, it is expected around 7.2 million households will receive UC, over half of which will be in work.

With such a significant number of people affected, it is imperative that the system works in their interests. But evidence from Citizens Advice suggests the system has a number of flaws that need addressing to prevent 7 million households from facing serious financial risk.

And this isn’t the first time similar conclusions have been reached.

Flaws

Back in February, a Guardian investigation found that policy design flaws in UC are pushing thousands of benefit claimants into debt. Former welfare minister Lord Freud also admitted to MPs that administrative problems and design issues with UC are causing around one in four low-income tenants to run up rent arrears, putting them at risk of eviction.

In 2016, an inquiry into UC and its implementation by the Public Accounts Committee highlighted the inflexibility of the payment systems which may cause financial hardship for some claimants.

Citizens Advice highlight three “significant problems” with UC:

people are waiting up to 12 weeks for their first payment without any income;

UC is too complicated and people are struggling to use it; and

people aren’t getting help when the system fails them.

The data shows that:

more than one in three people helped on UC by Citizens Advice are waiting more than six weeks to receive any income, with 11% waiting over 10 weeks;

nearly a third of people helped have to make more than 10 calls to the helpline to sort out their claim;

40% of people helped said they were not aware they could get an advance payment to help with the initial waiting period for their first payment;

over half of the people helped borrowed money while waiting for their first payment; and

UC clients are nearly one-and-a-half times as likely to seek advice on debt issues as those on other benefits.

A recent report from the Joseph Rowntree Foundation similarly highlighted the issue of waiting time, arguing that it required immediate action.

While Citizens Advice support the principles of UC, it argues that pushing ahead with roll-out while these problems remain will only put thousands more families at financial risk.

Recommendations

In response to these findings, a number of short and longer term considerations were highlighted where action will be needed to help secure the aims of UC by the end of roll-out. These include reducing the six week wait for initial payment, improving the support available for those moving onto UC, and helping people achieve financial stability on UC.

The charity recommends that the roll-out is paused while the government addresses the significant issues that have been highlighted. If improvements are not made, it is argued that both UC claimants and the government will face significant financial risks, which will increase rapidly if thousands more households move onto the benefit later this year.

If you enjoyed reading this, you may also like our previous article on in-work poverty.

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While household debt is still below its pre-crisis levels, it began to rise relative to incomes in early 2015 and remains high by historical and international standards, according to the Bank of England.

With the current uncertainty surrounding the economy following the EU referendum, there are concerns that household indebtedness could present a big risk to the UK economy.

So what do the statistics mean and just what impact could they have on the economy? A recent House of Commons briefing paper highlights the latest statistics and forecasts for household debt in the UK, including international comparisons, and the effects on the economy.

The statistics

The level of household debt more than doubled from £725 billion in early 2000 to £1,600 billion in late 2008. The global financial crisis resulted in a decline in the household debt-to-income ratio, however, from 168% at its peak in early 2008 to just over 140% in recent years. The levels of debt have increased again over the last couple of years, with annual rates of growth of around 3% recorded since 2014.

The Office for Budget Responsibility (OBR) forecasts that the household debt-to-income ratio will increase in coming years, peaking at 167% at the start of 2020, close to the pre-recession peak. However, this has been revised down on earlier forecasts, such as December 2014, when it was forecast to reach just under 184%.

Despite these increases, the costs of household debt is expected to remain low relative to household income, and much lower than pre-recession levels, due to continued low interest rates. As a result, the debt burden is more affordable for households.

Benefits

The negative effects of debt on individuals has been highly publicised, but low levels of household debt can also provide benefits to individuals and the economy, as highlighted in the briefing paper:

“It allows people to buy things, like a house, that they would not be able to pay for in one go, raising their standard of living. In other words, it allows people to smooth their consumption over time, including during periods when their incomes temporarily fall. This can provide stability to the economy.”

Consumer spending can obviously be good news for retailers and the high street and high levels of mortgage approvals is good for the housing market.

The paper highlights evidence that the accumulation of household debt from 1996 to 2003 contributed to economic growth, with indebted households adding roughly 0.35% points a year to overall consumer spending growth of about 4.5% per year over this period. So a total of 2.5% was added to the level of consumer spending from 1996 to 2003.

Nevertheless, higher levels of debt can make households more vulnerable if an economic downturn occurs. And as the briefing paper shows, the households most likely to have debt (excluding mortgages) are those in the lower wealth quintiles – who are already vulnerable.

Economic impact

As the Bank of England has warned, the ability of some households to service their debts would be challenged by a period of weaker employment and income growth, which could have a wider economic impact through reduced expenditure. And higher interest rates may also lead to further reductions.

This could then have a knock-on effect on businesses which, faced with reduced revenues, may have to cut back on costs such as labour costs by reducing wages or the workforce.

Indeed, research on the impact of household debt on the economy highlighted in the briefing paper suggests that large increases in household debt prior to recessions tend to lead to longer and more severe downturns. And this is as a result of households with high debt levels cutting back on their spending by more than other households during and after a recession.

According to a 2012 OECD working paper, high debt levels can create vulnerabilities by impairing the ability of households and companies to smooth their spending and investment. The paper also found that when household debt levels rise above trend, so does the likelihood of recession.

Other research has also found that large increases in household debt have preceded more severe and protracted recessions. And recovery following a recession was found to be typically slower in countries that carry the legacy of a large private credit boom.

Final thoughts

So it would seem that perhaps a certain extent of household indebtedness is good for individuals and the economy, in terms of maintaining growth. But when it rises above a certain level in relation to incomes, the evidence suggests it becomes a serious concern.

And with the current economic uncertainty, increasing household debt isn’t something to be ignored.

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In 2011, the Trussell Trust, a charity providing food aid across the UK was operating around 100 food banks. By the end of last year, that figure had risen to over 400.

The government standpoint

Food aid has become a divisive issue, largely because of disagreements about what’s behind the increased demand for emergency food aid. Last month, Priti Patel, employment minister at the Department for Work and Pensions (DWP) told the House of Commons that she did not accept claims by researchers that benefits sanctions could drive people to seek emergency food aid:

“There is no robust evidence that directly links sanctions and food bank use.”

Her contention is consistent with claims made under the coalition government. In February 2014, the Secretary of State for Work and Pensions, Iain Duncan Smith, suggested to the House of Commons that it was not welfare reform but greater awareness of food aid, that was increasing use of food aid:

“Food banks do a good service, but they have been much in the news. People know they are free. They know about them and they will ask social workers to refer them. It would be wrong to pretend that the mass of publicity has not also been a driver in their increased use.”

What does the research say?

The DWP position is at odds with research looking at food banks in an effort to explain their increasing use.

A 2014 report from the Child Poverty Action Group (CPAG) identified a number of factors driving people to use food banks. These include loss of earnings and changes in personal circumstances (such as bereavement and homelessness). But the report highlighted problems with benefits (notably delays and sanctions) as a significant factor causing people to seek emergency food aid.

In addition, first-hand accounts from those managing and working in food banks have strengthened the claim that there is a correlation between welfare reforms and increasing use of food banks.

In 2013, Ewan Gurr from the Trussell Trust told the Scottish Parliament’s Welfare Reform Committee that the number of people using food banks in Scotland had risen from 5,726 in 2011-12 to 14,318 in 2012-13. And he was unambiguous in identifying the main reason for this dramatic increase:

“We are seeing evidence every day, right across our food bank network, that welfare reforms are inextricably linked to the rise in demand for emergency food relief.

While the report acknowledged that benefits sanctions do not always represent the sole reason claimants turn to food banks, it observed that reduction and delays in benefits has meant families living on low incomes are worse off in the long term:

“There is a clear moral case to address the shortcomings that exist in our welfare system.”

The human impact

The impact of food poverty can be seen in the human stories that are often forgotten in the cut and thrust of the public debate. In March this year, a report highlighted the experiences of people around the UK trying to survive on very low incomes.

In one instance, a 57 year-old man’s benefits had been cut for 13 weeks because he failed to complete enough job applications.

“William came to the food bank in the first week of his sanction. He was given food and didn’t return until weeks 11 and 12. William was apologetic for having to come back again, but said that his tea, sugar and other basics had now run out. We spoke to him, to find out how he’d managed. He said he’d cut down on the amount he ate, and that the mild winter meant he had managed without heating.”

For those of us who thought food poverty was a bitter memory of a bygone era, the very existence of food banks is hard to stomach. As the Scottish Parliament’s Welfare Reform Committee concluded:

“They are a sign of a Dickensian model of welfare which should have no place in a prosperous nation. Ultimately the necessity for food banks should be eliminated.”

With the exponential growth of food banks across the country, that aspiration is unlikely to be realised any time soon.

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